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Planet Money

The year NYC went broke

with Steve Clifford, Donna Shalala, Felix Rowden

Published October 15, 2025
View Show Notes

About This Episode

The episode examines New York City's 1975 fiscal crisis, when years of accounting gimmicks and reliance on short-term debt led the city to the brink of default and inability to pay basic municipal workers. Through interviews with key participants like Steve Clifford and Donna Shalala, it details how the true scale of the hidden deficit was uncovered, how the Municipal Assistance Corporation (MAC) and an emergency control board were created, and how unions, real estate interests, the state, and ultimately the federal government were pressured into a shared-sacrifice bailout. The story traces the painful austerity and structural reforms that eventually restored the city's credibility and became a playbook for later municipal debt crises.

Topics Covered

New York City politics Sovereign debt default Bankruptcy Lender of last resort Government social programs Urban design and culture Debt crisis Municipal finance Unions and labor relations Federal bailouts

Disclaimer: We provide independent summaries of podcasts and are not affiliated with or endorsed in any way by any podcast or creator. All podcast names and content are the property of their respective owners. The views and opinions expressed within the podcasts belong solely to the original hosts and guests and do not reflect the views or positions of Summapod.

Quick Takeaways

  • New York City in the 1970s used extensive accounting gimmicks and short-term IOUs to mask a multibillion-dollar deficit, until markets abruptly stopped buying its debt.
  • Consultant Steve Clifford pieced together scattered financial records and showed the city controller that New York had about $3 billion in debt created by non-cash accounting tricks with no realistic way to pay it back.
  • As confidence eroded, a key 1975 auction of city IOUs drew no bids, revealing that lenders no longer trusted the city's "faith and credit" and pushing the city to the edge of default.
  • The state created the Municipal Assistance Corporation (MAC) and an Emergency Financial Control Board, effectively stripping New York City of budget autonomy in exchange for aid and market reassurance.
  • Donna Shalala and investment banker Felix Rowden worked to sell MAC bonds and broker a grand bargain in which unions used pension funds, real estate owners prepaid taxes, and the state and eventually the federal government all contributed to a rescue.
  • Labor unrest and service cuts, including police layoffs and a sanitation strike that left garbage piling up, dramatized the social costs of the fiscal crisis.
  • President Gerald Ford initially opposed a federal bailout, leading to the famous "Ford to City: Drop Dead" headline, but ultimately approved over $2 billion in loans once it was clear a default would be nationally damaging.
  • Recovery required years of tax hikes, deep service cuts, and stricter, more transparent accounting, making the city a tougher place to live-especially for poorer residents-but restoring market trust.
  • Later municipal crises in places like Philadelphia, Washington, D.C., Detroit, and Puerto Rico drew on the institutional and political playbook first assembled during New York City's 1970s crisis.

Podcast Notes

Introduction: Everyday city services and the role of money

Daily city services on the host's Brooklyn street

Sanitation workers collect garbage for the building[0:36]
• Three New York City sanitation employees arrive in a large truck each Tuesday morning to remove residents' trash
• They wear stained high-visibility green T-shirts and represent part of a vast workforce that keeps the city livable
Other city employees in everyday life[1:09]
• An hour after the garbage is collected, the host's daughter leaves for her public middle school staffed by city-employed teachers
• A nearby fire station with sirens blaring is staffed by firefighters who are also city employees
Scale of New York City's municipal workforce[1:25]
• More than 300,000 people work for the city of New York across various services like sanitation, education, and emergency response
• These workers make possible the basic functioning of the city as a place to live

Taxes and funding flows that support city operations

Household-level taxes that feed the city budget[1:55]
• The host's family pays city income tax, property tax, and sales tax
• Because the host's wife is self-employed, they also pay the Metropolitan Commuter Transportation Mobility Tax
Different timing of revenues versus payroll[2:09]
• City employees are mostly paid every two weeks
• Major tax inflows arrive on different schedules: income tax in April; property taxes in July and January; big chunks of state and federal money also come sporadically

Short-term debt as a cash-flow management tool

How large U.S. cities handle cash-flow mismatches[2:32]
• Cities like Chicago, Los Angeles, Houston, Philadelphia, and San Francisco use short-term borrowing to bridge the gap between when bills are due and when taxes arrive
• They sell short-term IOUs that last only a few months to effectively move future tax money into the present
New York City's cautious approach after past mistakes[3:15]
• New York hasn't needed to use much short-term debt recently because it keeps more cash on hand
• The city's caution is directly tied to a past period, 50 years ago, when it was "very, very not careful" and basic city functions started to break down

Planet Money sets up the historical case study

Framing the episode as a look at system failure[3:11]
• Hosts Keith Romer and Nick Fountain explain that understanding how things work can be easier if you look at a moment when they stopped working
• They announce that the show will focus on New York City in 1975, when the city ran out of money and could not find anyone willing to lend it what it needed
Themes of trust, debt, and regaining credibility[3:33]
• The episode will explore what it takes when no one trusts you enough to loan you several billion dollars and how hard it can be to re-earn that trust

1970s New York City: shrinking tax base and rising demand

Economic and demographic pressures on the city

Loss of tax base due to white flight and deindustrialization[4:38]
• White flight and the loss of manufacturing took a big chunk out of New York City's tax base in the 1970s
Increased demand for social services[4:47]
• The city had generous social services, and there were big influxes of lower-income people moving into New York
• A nationwide recession further increased demand for support, putting additional pressure on the city budget

Steve Clifford's memories and role

Steve Clifford's view of New York in the 1970s[4:55]
• Steve describes the city as exciting but dysfunctional, with widespread perceptions that "New York City was going to hell"
• He recalls subways that were extremely hot in the summer, crime, and pervasive dirt
Steve's dual roles and unconventional profile[5:36]
• He ran a fiberglass furniture business with a friend serving interior designers
• He also worked part-time as a consultant for the city controller, digging through the city's financial records
• Steve had experience with city finances and an MBA from Harvard but otherwise did not fit the typical City Hall mold, describing himself as a late-start hippie with long hair, jeans, dashikis, a Soho loft, and heavy drug use

City's heavy reliance on short-term IOUs

New York City's extensive use of cash-flow borrowing[6:03]
• Because money was tight, the city repeatedly used the short-term debt "magic trick" of selling IOUs backed by expected future revenues
• It sold IOUs against anticipated real estate taxes and expected state and federal aid later in the year
Why markets originally trusted New York debt[6:36]
• Banks were happy to buy the IOUs because they paid good interest; individual investors, insurance companies, and other banks also bought them from the original banks
• Rating agencies considered New York City debt safe, and observers would look at Park Avenue real estate and conclude the city could not go broke due to the enormous underlying property value

Uncovering accounting gimmicks and the hidden deficit

Steve Clifford's investigation into the city's books

Lack of coherent financial record-keeping[7:00]
• Steve says there was effectively "no record-keeping," despite the existence of a formal balance sheet, income statement, and computers
• He likens the situation to the Wizard of Oz, suggesting an illusion of control behind the scenes
Aggregating scattered financial data[7:00]
• Steve gathered information from numerous funds, accounts, and sub-budgets related to the city's finances
• Initially almost for fun, he began adding the various pieces together and discovered a very large problem

Description of budget gimmicks and non-cash "revenue"

Decade-long uncoordinated charade[7:54]
• For at least 10 years, various city officials devised different gimmicks that produced accounting revenue but not actual cash
Examples of gimmicks: delaying expenses[7:59]
• The city would delay expenses such as pension fund payments: a payment due June 30 would be shifted to July so it fell into the next fiscal year, improving the current year's budget appearance
Examples of gimmicks: optimistic revenue assumptions[7:59]
• The city treated its initial revenue estimates (for example, projected tax collections) as final for balance sheet purposes, regardless of what actually came in
• These practices were technically legal but did not conform to generally accepted accounting principles

Political incentives behind the shenanigans

Motivations of elected officials[9:05]
• Politicians used these maneuvers to fund new initiatives and maintain generous social services that they saw as helping people and making the world better
• The gimmicks also allowed them to add jobs, raise wages, and maintain good relations with powerful unions whose political support they needed
Debt as the ultimate backstop for gimmicks[9:39]
• Once the squinting stops, the hosts note that all the sleight of hand was effectively funded by increasing amounts of short-term debt via IOUs, issued again and again
• Steve says nobody understood the cumulative effect of all these moves

Revealing the $3 billion problem and internal reaction

Steve reports findings to City Controller Jay Golden[9:55]
• Steve tells Golden that the city has $3 billion in debt with no way to pay it, because the debt arose from accounting gimmicks rather than real surpluses
• Golden initially struggled to take Steve seriously, in part because Steve still looked like a hippie, wearing jeans and sandals to work
• Steve bluntly tells him the city is effectively bankrupt, which Golden initially finds impossible to accept
Even stopping gimmicks would not erase existing debt[10:35]
• Steve explains that even if the city immediately ended all shenanigans, billions in obligations remained from past years' gimmicks

Rolling over IOUs and eroding market trust

Dependence on continual rollover of short-term debt[11:13]
• To avoid default and keep basic operations going, the city had to issue new IOUs whenever old ones came due
• Steve sums this up as the only move available: "roll it over, roll it over, roll it over"
Rising interest rates and investor skepticism[11:18]
• Toward the end of 1974 and into 1975, banks' trust began to erode, and they demanded higher interest rates on the city's IOUs
• Banks began asking what was really behind the constant rolling over, and when told it was the "faith and credit of New York City," they probed what that actually meant in monetary terms

The failed IOU auction and the brink of chaos

The February 1975 auction with no bids

BBC-documented bond sale attempt[11:50]
• A BBC film captured the moment when the city offered $260 million in tax anticipation notes for competitive bidding
• Normally, bank syndicates would submit bids in a tin box, but on this day, no bids were submitted by the expected 2 p.m. deadline
Public acknowledgment of failed sale[11:50]
• An official delays the announcement, saying they expect an offer at 4 p.m., and refuses to say directly that they haven't sold the notes so far
• In reality, nobody thought it was worth lending the city more money that day

Immediate aftermath and risk of default

Temporary reprieve but looming cash exhaustion[12:44]
• A couple of weeks later, the city managed to sell some new short-term debt, but that was essentially the end of the line
• Without continued rollover, the city had only enough cash to function for a month or two
Potential chaos if the city ran out of cash[12:49]
• Steve describes a scenario in which welfare checks do not go out and police are not paid on the same day, leading to "total chaos"

Mayor Abe Beam's public response

Beam blames higher levels of government[13:07]
• As journalists press him, Mayor Abe Beam blames the crisis on the state of New York and the federal government for not sending enough money for social services
• He argues that New York City is carrying costs that are not properly city responsibilities

Introduction of Donna Shalala and criticism of Beam

Donna Shalala's view of Abe Beam's leadership[13:35]
• Donna characterizes Beam as short, inarticulate, and bumbling, and believes he was totally over his head
• Despite having been the city controller, Beam could not even state how many employees the city had
Donna's background at the time[14:07]
• She was a political science professor specializing in relationships between states and local governments
• Later she would become Secretary of Health and Human Services and a member of Congress, but during the crisis she was an academic living in New York City and working on a book

Creation and role of the Municipal Assistance Corporation (MAC)

Governor Hugh Carey recruits Donna Shalala

Initial phone call and summer project pitch[14:17]
• In June 1975, Governor Hugh Carey calls Donna and asks what she is doing for the summer
• He explains that the state has already prepaid $800 million in aid to prevent default but needs a longer-term solution
• He describes a new government entity he is creating and frames Donna's potential role as a quick summer project after which she can return to her book
• Donna notes she never finished the book but had a life-changing experience instead

Structure and purpose of MAC

MAC as a proxy borrower for the city[15:17]
• The Municipal Assistance Corporation (MAC) is created so lenders can avoid lending directly to New York City, instead lending to MAC which then supports the city
• The pitch to investors is essentially: if you do not trust the city government, lend to MAC, backed by the state, and let MAC worry about the city
MAC's revenue streams and backing[15:36]
• MAC receives first claim on sales tax collected in the city, giving it a predictable income source
• MAC bonds are backed by New York State's credibility rather than the city's, making them theoretically safer
Goal of stretching out city debt[15:56]
• Donna explains that MAC was set up to issue bonds that would stretch out New York City's debt, buying time for the city to get its financial house in order

Composition of the MAC board and Felix Rowden's role

Donna as sole woman and youngest member[16:07]
• Donna, at age 34, is the only woman on the MAC board
• The rest of the board comprises corporate leaders, a senior law firm partner, and high-profile financiers
Introduction of Felix Rowden[16:18]
• The board includes a famously charming investment banker named Felix Rowden
• Donna says he had a gift for pulling people together and making decisions, and he coached her despite initially finding her a "pain"
• She credits him with teaching her about leadership
Rowden as a calm public communicator[16:47]
• Rowden becomes the public face of MAC, appearing frequently on television and in newspapers
• He is described as having a great overbite smile, big bushy eyebrows, and an air of calm, almost wry amusement amid the crisis
Rowden's shock at fraudulent accounting[16:56]
• Rowden says he never realized how fraudulent the city's accounting was, describing practices like projecting revenues a century ahead but expenses as of yesterday
• He calls such manipulation "a way of life" in the city at that time

Initial expectations versus reality in selling MAC bonds

Rowden's assumption about easy market absorption[17:38]
• Coming from mergers and acquisitions, not municipal finance, Rowden assumed bonds backed by the full faith and credit of New York State and first claim on city revenues, paying 8-9%, would be readily bought
Difficulty convincing investors[18:00]
• Donna says it was "much more difficult"; no one believed in the credibility of New York City government despite MAC's structure
• MAC board members, including Donna and Rowden, had to actively "peddle" the bonds around the country

Bond-selling roadshow and gender discrimination incident

Trip with David Rockefeller to Dallas bankers[18:15]
• Donna travels on a private plane with David Rockefeller, then head of Chase Manhattan Bank, to Dallas to meet Texas bankers
Dallas Athletic Club front-door confrontation[18:52]
• Upon landing, staff inform Rockefeller that Donna cannot enter the front door of the Dallas Athletic Club because women are barred
• They propose taking her through the back door, but Rockefeller refuses, saying he has never gone in a back door and instructs her to follow him through the front entrance
Failure to sell bonds in Dallas[19:08]
• At the meeting, a banker challenges why they should invest in a city whose mayor does not know how many employees he has
• Donna says David Rockefeller could not answer that question, and she doubts they sold many bonds that day

City spending cuts and union backlash

Mayor Beam announces cuts to social services and jobs[19:30]
• With cash dwindling and borrowing constrained, the city plans to pull back social services and eliminate municipal jobs
Union anger and protests[19:57]
• Large and powerful city workers' unions are outraged by layoffs and cutbacks
• Protests erupt, including a group of laid-off policemen and supporters near City Hall chanting for help
"Welcome to Fear City" campaign[20:01]
• Police union members hand out brochures titled "Welcome to Fear City" at airports and hotels, warning tourists about dangers after police layoffs
• The brochures advise visitors not to take the subway, to stay off streets after 6 p.m., and essentially not to walk anywhere

Sanitation strike and public fear

Garbage collection stops in summer heat[20:18]
• In early July, sanitation workers stage an unofficial but extensive strike; no garbage has been picked up since the weekend
• Trash piles up at a rate of 28,000 tons a day in 90-degree weather
Public reactions to layoffs and garbage[20:43]
• A woman in Manhattan says layoffs could have been avoided if Beam and other officials cut $2,000 from their own salaries
• Another resident expresses fear about losing 5,000 police officers and facing 28,000 tons of garbage on sidewalks, saying she will stay locked in her house
Garbage strike undermines MAC's efforts[21:02]
• Donna calls the sanitation strike the worst possible event for MAC's work, as trash piled in the streets created a vivid sense of breakdown
• She remembers walking through the city and smelling garbage everywhere, with some areas where people lit trash piles on fire in the streets

Felix Rowden pushes for a unified response

Rowden's media presence urging action[21:19]
• Rowden appears frequently in the media, emphasizing that the future of the city is in the hands of key stakeholders
• He expresses disbelief that "very decent" men would fail to act when their own future is at stake along with everyone else's

Approaching default and building a grand bargain

Recap of the summer 1975 predicament and MAC's limits

City's simultaneous obligations and lack of lenders[23:30]
• By summer 1975, New York City owes billions in short-term debt and must also pay salaries for teachers, police, and sanitation workers without having the money
• Lenders are unwilling to extend further credit, and even MAC struggles to sell its bonds despite state backing
Uncertainty over consequences of default[24:09]
• Donna says nobody knew exactly how bad a default would be, but they knew it would be extremely damaging
• She believes it would have halted New York's growth, severely underfunded schools, shrunk municipal jobs, and damaged one of the world's major economic engines

Stakeholders who would be harmed by default

Investors, real estate, unions, state, and federal government[24:38]
• Bondholders would suffer losses, real estate developers would face tougher financing, and city workers' unions would see layoffs and wage cuts
• The state would have its largest city cease to function, and the federal government would see the nation's financial capital in meltdown

Felix Rowden's strategy for shared sacrifice

Rowden's confidence in brokering a "grand deal"[25:15]
• Donna describes Rowden as confident in his ability to craft a grand deal that required buy-in from all parties
Concept that everyone must give something up[25:23]
• Rowden pushes the idea that everyone has to take cuts and share the pain to keep the city solvent
• On the news, he warns about companies potentially leaving New York if the crisis spirals, leading to a city needing more services with fewer taxpayers and perhaps becoming a "gigantic slum"
Behind-the-scenes negotiations[25:38]
• Away from cameras, Rowden works to persuade unions, business leaders, and officials to understand the implications of bankruptcy and the advantages and disadvantages of various choices

Deals with real estate interests and unions

Real estate owners prepay taxes[26:36]
• Major property owners agree to pay hundreds of millions in real estate taxes months before they are due
• Donna notes they did this partly out of loyalty to New York but also because they and Rowden believed the country could not survive without a functioning New York City
• They also received a discount on those prepaid taxes, but the key outcome was that the city got needed cash
Unions use pension funds to buy MAC bonds[26:46]
• After extensive negotiations, city employees' unions agree to invest billions of dollars from their pension funds in MAC bonds that the open market is shunning
• Donna says everyone in both private and public sectors was concerned about jobs, creating a wartime-like sense that "if this goes down, we're all going down with it"

Mixture of public spirit and self-interest

Transactional yet civic-minded New York ethos[27:45]
• Donna characterizes the deals as "New York transactional": people did the right thing for the city while also ensuring they got a piece of the deal
• She agrees with the hosts that this dual motivation-public-spiritedness and self-interest-was common in these negotiations

State control, federal hesitancy, and the "Drop Dead" moment

State's conditions and loss of fiscal home rule

Emergency Financial Control Board[28:38]
• As part of a $2 billion aid package, New York State requires the city to cede significant budget authority to a new Emergency Financial Control Board
• The control board gets final say over almost every financial move and enforces deep cuts to ensure true budget balance
• Donna says the state essentially took away home rule from the city regarding financial matters

City's appeal to the federal government

Mayor Beam asks for federal guarantees[29:29]
• In fall 1975, Mayor Abe Beam travels to Washington, D.C., asking the federal government to guarantee New York's securities until it can reenter credit markets on its own

President Ford's initial rejection and rationale

Ford's speech opposing a bailout[29:53]
• President Gerald Ford declares that responsibility for New York's fiscal problems is being left on the federal government's doorstep "unwanted and abandoned" by its real parents
• He argues against making taxpayers bail out investors and worries about the precedent it would set for other cities to be fiscally irresponsible
• Ford says he is prepared to veto any bill that provides a federal bailout to prevent a default, calling himself fundamentally opposed to that solution

Iconic "Ford to City: Drop Dead" headline

Daily News front page and public memory[30:44]
• The New York Daily News runs a famous headline summarizing Ford's stance as "Ford to city. Drop dead."
• Donna remembers the headline vividly and says she had it framed for a long time

Why the federal government ultimately intervened

Federal incentive trap and electoral politics[31:06]
• Despite Ford's rhetoric, the federal government faces the same incentive problem as others: it cannot afford to let New York City go bankrupt
• Ford also has a presidential election coming and New York carries many electoral votes
Federal loan package to New York City[31:31]
• In December 1975, the United States agrees to provide more than $2 billion in short-term loans to New York City
Donna's later conversations with Ford[31:33]
• Donna later talks with Ford at a conference in Vail, where he says he does not regret his approach
• Ford tells her that from his perspective, the standoff forced the city to pull itself together and implement reforms

Aftermath, recovery, and the crisis as a template

Austerity measures and social impact

Tax increases, service cuts, and job reductions[32:07]
• Recovery is not immediate; it takes years of tax hikes and slashing public services to balance the budget
• Police, teachers, and sanitation workers are cut back, making the city a harder place to live, especially for poorer residents

Restoration of credible accounting and market trust

Aligning budget numbers with reality[32:33]
• Over time, the city's budget numbers start to reflect actual inflows and outflows instead of optimistic accounting
• Eventually, markets regain confidence that they can trust the city's reported finances
Return to short-term borrowing[32:41]
• By 1979, for the first time in four years, New York City can again sell short-term debt

Legacy: a playbook for later municipal crises

Other entities facing similar debt problems[32:56]
• The hosts note that New York is not unique; Philadelphia and Washington, D.C. in the 1990s and Detroit and Puerto Rico in the 2010s also faced overwhelming debt
• Because of New York City's experience, these later crises had a playbook to follow, involving tough and painful steps to regain solvency and trust

Closing credits and acknowledgments (non-promotional)

Production and editorial team[33:23]
• The episode is produced by Samuel Horst Kessler and James Sneed with help from Julia Ritchie, edited by Jess Chang, fact-checked by Ciara Juarez, and engineered by Debbie Daughtry and Sina Lofredo, with research help from Will Chase and Jane Gilvin
• Alex Goldmark is the executive producer, and several individuals, including Dennis Coleman and David Schleicher, are thanked for assistance

Lessons Learned

Actionable insights and wisdom you can apply to your business, career, and personal life.

1

Opaque accounting and short-term financial gimmicks can sustain an illusion of stability for years, but when trust breaks, the reckoning is sudden and severe.

Reflection Questions:

  • • Where in your personal or organizational finances might you be relying on optimistic assumptions instead of transparent, reality-based numbers?
  • • How could you redesign your reporting or dashboards so that cash flows and obligations are impossible to ignore or creatively reinterpret?
  • • What is one area this month where you can replace a "patch" or workaround with a more honest, sustainable structure?
2

In complex crises, durable solutions usually require shared sacrifice, where every major stakeholder concedes something to prevent a larger collective disaster.

Reflection Questions:

  • • Who are the key stakeholders in a challenge you are facing, and what would shared sacrifice look like for each of them?
  • • How might clearly explaining the worst-case scenario, as Felix Rowden did, change others' willingness to compromise with you?
  • • What is one concession you could offer that might unlock a more comprehensive, win-win-avoid-disaster agreement?
3

Credibility and trust are forms of capital: once squandered, they are expensive and time-consuming to rebuild, but they can eventually be restored through consistent discipline.

Reflection Questions:

  • • In what relationships or contexts has your credibility been weakened, and what specific behaviors contributed to that erosion?
  • • How could you commit to a stricter set of rules or guardrails-like an external control board-that would signal reliability over time?
  • • What small, repeatable action could you take over the next 90 days that would demonstrate to others that your promises now match reality?
4

External oversight and constraints, while painful and politically unpopular, can sometimes be necessary to break entrenched bad habits and force structural reform.

Reflection Questions:

  • • Where might you or your organization benefit from inviting stricter outside scrutiny, even if it feels uncomfortable in the short term?
  • • How could you design mechanisms-deadlines, accountability partners, audits-that function like a "control board" for your most important goals?
  • • What current practice would you be willing to subject to external review in order to improve its long-term soundness?
5

Appealing to both self-interest and civic or mission-based purpose is often more persuasive than relying on either one alone when mobilizing people around hard choices.

Reflection Questions:

  • • When you next need to persuade a group, how can you articulate both the personal benefits and the broader purpose of taking action?
  • • Which stakeholders in your world might respond better if you framed an issue not just as "the right thing to do" but also as essential to their own survival or success?
  • • What is one current negotiation or conversation where you could reframe the proposal to highlight a clearer mix of shared mission and individual upside?

Episode Summary - Notes by Hayden

The year NYC went broke
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